Deluxe Corp (DLX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Deluxe Corporation Fourth Quarter 2003 Year Ended Conference Call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. If you do need assistance during the call today please press the "*" followed by the "0". As a reminder today’s call is being recorded. At this time I'd now like to turn the conference over to Mr. Stuart Alexander. Please go ahead sir.

Good morning everyone, and welcome to Deluxe Corporation's 2003 fourth-quarter and year-end investor conference call. Today you will hear from Larry Mosner, Chairman and Chief Executive Officer; and Doug Treff, our Chief Financial Officer. As in the past, Larry and Doug will take questions from analysts at the end of the prepared comments. In accordance with regulation FD this conference call is open to all interested parties. A replay of the call will be available via telephone and Deluxe's website and I will tell you how to have access to replay at the conclusion of our teleconference.

Before I turn the call over to Larry, I will make a brief cautionary statement. Comments made today regarding earnings estimates and projections and statements regarding management's intentions and expectations regarding the future performance are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. As such these comments are subject to risks and uncertainties that could cause actual future results to differ materially from those projected. Additional information about various factors that could cause actual results to differ from those presented are contained in the news release that we issued this morning and in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003. In addition, the financial and statistical information that we'll review during this call is addressed in greater detail in today's press release, which is posted on our web site - www.deluxe.com in the investors relation section and was furnished to the SEC in the Form 8-K filed this morning. In particular any non-GAAP financial measures mentioned during this call are reconciled to their comparable GAAP financial measure in the press release. With those items out of the way, I will now turn the call over to Larry Mosner.

Thank you, Stu, and thanks to everyone on the line for joining us today. As we reported in this morning's press release, we hit the high end of the EPS guidance we provided at the end of the third quarter. The 77 cents was the result of cost management efforts and productivity improvements and was in spite of some non-recurring charges related to actions that will lower our future cost structure. Doug will provide you with financial details. After which I will discuss some highlights from our three business segments. In addition, I will talk briefly about our business outlook for 2004. After our prepared comments Doug and I will take your questions. We'll begin our prepared comments with Deluxe's CFO, Doug Treff. Doug.

Thanks, Larry. I will begin by covering the operating results for the fourth quarter. As Larry stated, we delivered earnings on the high end of our guidance for the quarter. We reported fourth quarter earnings per share or EPS of 77 cents on net income of $39m compared to EPS of 84 cents and net income of $52m for the same period in 2002. The primary factors contributing to the decline in earnings were net charges and the decline in the revenue. In the fourth quarter, we recorded net charges of $10m; these charges resulted in a decrease in EPS of 12 cents for the quarter. As we discussed during our third quarter earnings call, we continue to take actions to vigorously manage our cost and announced the closing of two additional check printing facilities and continued reductions in selling, general, administrative expenses or SG&A.

In the fourth quarter, we recorded severance charges of $9m related to reduction in force of 450 employees in various functional areas. Of this amount, $4m was charged to cost of goods sold and $5m was charged to SG&A. As a result of these actions, we expect our 2004 savings to be almost $20m. In addition, we continued our cost management efforts by modifying employee eligibility to retiree healthcare benefit. As a result of this plan change, we recognized the gain of $4m during the fourth quarter of 2003. Asset impairment charges related to manufacturing technologies and software assets were $5m for the quarter. We continually evaluate the future usefulness of our assets; when they will provide less future benefits, we write them down to their estimated fair values - this is what we did during the fourth quarter.

Revenue decreased 2.1% from last year's $301m; this was driven by a 1.1% decline in revenue per unit as a result of continued pricing pressure in the financial services segment. The impact of this pricing pressure was partially offset by the continued strength in selling premium price license and specialty check designs and additional value-added services. Unit volumes decreased 1% due to a general decline in check usage and lengthening reordered cycles for our direct check segment, partially offset by new business we have gained from financial institutions. Gross margin was 65.6% of revenue compared to 66.0% in 2002. Lower revenue per unit and net charges of $2m more than offset strong productivity improvement in our plants and distribution centers. We continue to realize the efficiency as a result of implementing lean and cellular manufacturing concepts.

SG&A was 41.2% of revenue compared to 39.5% in the fourth quarter of 2002. For the quarter, higher advertising expense and net charges of $3m were partially offset by lower employee cost related to performance-based compensation and lower discretionary spending. As a result of the net charges of $10m and the lower revenue, our operating income decreased 15% to $69m from $81m last year. Our operating margin for the quarter was 22.9% of revenue compared to 26.4% a year ago. Interest expense increased $3m in the quarter primarily due to higher debt levels. Our average debt level was almost $365m higher in the fourth quarter this year as we continue to repurchase shares thereby lowering of our cost of capital and improving returns to shareholders. Our weighted average interest rate was approximately 45 basis points higher related to the issuance of long-term debt during the past 13 months. Our tax rate was 38.4% for the quarter compared to 34.2% for the fourth quarter of 2002. Fourth quarter 2002 results were favorably impacted by the resolution of tax audit, partially offset by a valuation allowance to establish for certain differed tax assets.

Now, let's go the fourth quarter's financial results in each of our three businesses starting with financial services. Revenues decreased 6.8% to $164m. Operating income decreased 24.9% to $25m. The primary factor affecting revenue was lower prices on checks sold to financial institutions. As we've discussed before, financial services is experiencing heightened price competition as check usage declined, and this competition has produced greater discounting as we have renewed or signed new contracts with the financial institutions. Financial services operating income was also impacted by the net charges that I discussed earlier. In our direct checks business, revenue was down 2.2% to $73m for the quarter. The lower revenue was due to a decline in check usage, the negative impact of longer reorder cycles, and lower response rates, partially offset by an increase in revenue per unit. Premium price licensed and specialty check design along with revenue from selling value-added services contributed to the increase in revenue per unit. Operating income for direct checks decreased 24.1% to $21m, primarily due to a higher advertising expense related to new customer acquisition. In our business services segment, revenue increased 12.9% to $64m as a result of strong growth in unit volumes from both new and existing small business customer, driven primarily by referrals from our business partners. As a result of the strong top-line growth operating income in business services increased 14.4%.

Let's move on to consolidated results for the year. Net income decreased 10.2% to $193m or $3.49 per diluted share. 2003 results included severance and asset-impairment charges of $17m and the gain of $4m relating to the retiree healthcare plan changes I mentioned earlier. These items resulted in a net decrease in EPS of 15 cents. Revenue decreased 3.3% to $1.24b due to a unit decline of 3.8%. The drop in units was driven by a general decline in check usage and lengthening reorder cycles and lower response rates for our direct check segment. This was partially offset by higher unit volume for our business services segment. Gross margin decreased to 65.7% of revenue compared to 66.1% for 2002. The decrease was primarily due to lower unit volume and net charges of $4m primarily related to the announced closely of three check printing facilities. SG&A was 39.6% of revenue compared to 39.2% in 2002. However, SG&A dollars were lower by $11m due to lower employee costs and discretionary spending in response to the current business and economic environments, partially offset by the net charges of $4m. As a result of revenue decrease and the net charges of $13m, operating income decreased to 7.5% to $319m. Operating margin was 25.7% of revenue for the year.

Our interest expense increased $14m compared to 2002 due to higher interest rates and debt levels related to share repurchase activity. Our 2003 tax rate was 35.7% compared to 37.1% in 2001. During the third quarter of 2003, we experienced a favorable tax rate due to the closure of prior year income tax audits and tax periods. We anticipate our 2004 income tax rate to be approximately 38%. The higher rate reflects a growing trend we see in several states where we operate, to raise taxes and businesses as a means of addressing budget deficit. Now to highlight a few other items from our balance sheet and cash flow statement, net debt, total debt net of cash increased $38m from the end of the third quarter and $409m since the end of last year, as we continued to repurchase shares. During the fourth quarter, we issued $25m of variable rate two-year notes. The notes were issued from our $250m medium-term notes program that was launched in September under our registration statements covering the periodic issuance of up to $500m of debt securities.

We repurchased almost 3% of our shares outstanding or 1.4m shares during the fourth quarter at an average price of $40.47 per share. For the year, we spent more than $500m to repurchase 12.2m shares or nearly 20% of our shares outstanding at an average price $41.53 per share. As a result of our continuing repurchase activity, shareholder's equity is in a negative position. We believe that repurchasing our stock continues to be a prudent investment. The 10m share repurchase authorization we announced in August of last year reinforces our commitment to effectively put excess cash to work to maximize returns for all shareholders. At the same time, it will continue to move us toward our target capital structure; still we are repurchasing more slowly as we near our targeted maximum debt level of $700m. A look at the cash flow statement shows that cash provided by operating activity was $182m for the year. Cash flow is 29% lower than last year due to reduced earnings, changes in accounts payable, the amount and timing of advertising spend, and higher upfront contract acquisition payments. Contract acquisition payments were $48m compared to $35m in 2002.

Capital expenditures for the year were $22m; we reduced our capital spending in response to business conditions, and in order to focus our efforts on a limited number of initiatives. We anticipate spending approximately $30m on capital projects in 2004. There are two more items from the news release that I'd like to cover. The first one being our announcement to adopt the fair value method of recording stock-based compensation, as contained in Statement Of Financial Accounting Standards No. 123, accounting for stock based compensation. Beginning in 2004, all future employee-based -- employee stock-based compensation and the unvested portion of previous stock option grants will be expensed over the option vesting period, based on the fair value of the date the stock awards are granted. If we had adopted SFAS No.123 in 2003, operating income would have been $7m less.

I'll finish my prepared comments by saying that we expect our first quarter earnings per share, to be in the range of 85-88 cents per share, with full year EPS of approximately $3.50 per share. These estimates include the impact of expensing all stock-based compensation, I just mentioned. However, they exclude the impact of any repurchases subsequent to December 31, 2003. I look forward to taking your questions in a few minutes, but first I will turn the call over to Larry.

Thank you, Doug. And thank you to everyone for joining us on this call, whether you're with us by phone or the Internet. 2003, was a challenging year, and there were a number of reasons; the continued decline in check volume due to the increased use of electronic payments, competitive pricing in our financial institution channel, soft response rates in our direct check business, and an economy that rebounded in the later half of 2003, but is yet to produce improved employment levels. Because there is correlation between having a job and being able to open a checking account and write checks, the level of employment is a key factor for the payments industry. In addition when a time came to compare the year to the previous one, 2003's results seemed diminish because 2002 had been a record year for in many areas.

Still 2003 was a good year, a year with results many companies would envy. Net income of more than $192m, earnings per share of $3.49, revenue of $1.24b, gross margin at 65.7% of revenue, operating margin at 25.7% of revenue, and net margin at 15.5% of revenue. All respectable numbers just not the back-to-back record performance we had planned for. As I commented in the release this morning, we are taking a number of actions so that in a year from now we hope to be able to share the details of our 2004 results, that will be as good as or better than what we delivered in 2003, after adjusting for the impact with expensing stock-based compensation.

During last quarter call, I outlined in considerable detail the challenges that our business faced most of last year; challenges by the way, we expect to persist in 2004. As I stated at that time, we expect the check usage will continue to decline 3-4% annually. Another challenge is that response rates for direct businesses are likely to remain soft, making new customer acquisition in the direct channel difficult, not to mention more costly.

The third primary challenge affecting our businesses is pricing pressure in our financial services segment. Before I move on and explain how we're actively addressing these issues across all three business units, I want to describe the dynamics around price competition in the Financial Services Business. Based on the questions during our last quarterly call, this topic is of particular interest to many of you. As you probably know, the issue of competitive pricing is something that has been lowering our results in this segment for several years now. Price competition has resulted in steep discounts and upfront contract payments, especially as the consolidation of the banking industry has continued. When that consolidation results into all very large banks, forming an even larger one, the surviving bank then has even more negotiating leverage. Having established the lay of the land as it were, I want to discuss our response to all three of the market and business conditions I mentioned. Each of the business segments has initiatives that are directed at maximizing the revenue generated from check order transactions. I will discuss some of them when I talk about business segment highlights.

We are also combating business challenges by continuing to manage our cost aggressively, through both productivity improvements and cost reductions. And lastly, we have adopted a more focused selling approach within our financial services segment and here is what it looks like. Our primary focus is customer and client retention. This goal is paramount because of our leadership position in serving this market segment. Specifically, we will target financial institutions that understand the extra value we bring to the table; those financial institutions that value high quality and superior service, those financial institutions to whom low price isn’t the only objective, and to whom customer satisfaction for their customers is equally important, those banks and credit unions that want a strategic partner with not only the best consumer knowledge, but also the check program management skills to drive higher check revenue and profitability, while increasing their customer satisfaction. Naturally clients we already serve, clients who have experience with us, are more likely to value what Deluxe brings to the partnership. The second part of our approach to the market has to do with new business opportunities. Our experience has shown us that if a financials institution is satisfied with its check program supplier, it takes steeper discounts for it to consider switching suppliers. It follows then that any business we might win would be at lower profit margins. Therefore instead of pursuing these scenarios, we will do what I just said and target financial institutions for which low price isn't the only goal. There is an ongoing wildcard in all of this and that's continued consolidation activity in the financial institution industry. It's not something we can forecast. But when a consolidation does take place, whether it results in share loss or share gain, it almost always results in additional pricing pressure. I'll wrap up my discussion of this topic with an outlook on how we expect pricing to affect 2004. We believe that based in what we know, our plan to focus on retaining existing business and our intent to be selective in the pursuit of new business will help us mitigate some of the revenue per unit erosion we experienced in 2003.

Let's move on to some highlights from our three business segments. First, financial services, specifically an update on our DeluxeSelect program. As I have shared with you previously, our DeluxeSelect program is a key factor that differentiates Deluxe from our competition. Since we launched the program in 2002 many financial institutions, some of whom were Deluxe's clients before and some of whom were not, have come to see that DeluxeSelect puts the right products into their customers hands and that leads a greater customer satisfaction. At the same time the program drives new revenues from the financial institution's existing check program with very little additional effort on their part. As an example, we are most pleased with as one of our clients that chose the DeluxeSelect program last year. Well most things on the DeluxeSelect programs in increase in revenue per order when their customers place orders to one of our DeluxeSelect channel, this thing has a seen a significant increase. In fact, average revenue per order doubled and in some cases even tripled compared to orders placed through the so-called traditional order channels. As of the end of 2003, more than 3,300 financial institutions had enrolled in the program, substantially more than the 200, who enrolled at the end of 2002.

We have also seen a respectable increase in the percentage of all financial services orders coming in through DeluxeSelect channels, a jump from 2.9% in 2002 to 5.1% in 2003. Financial services enter the year on even more positive note processing 7.5% of all its orders in December via DeluxeSelect channels. When we recently surveyed bank consumers who are ordering through our DeluxeSelect channels, 70% said the experience they had with us improved their opinion of their own bank or credit union. These results proved that DeluxeSelect is doing exactly what we expected from it and is great news both for Deluxe and our clients. There is a highlight in our financial services segment that is the direct result of the two expos we held in 2002 where we launched our DeluxeSelect program to clients and potential clients. These sessions demonstrated there was an obvious need for knowledge and idea sharing among peers and business experts. To attempt to meet that need in 2003, we sponsored two knowledge exchange expos, events designed to identify and solve customer issues intrinsic to the financial services industry. We were delighted when more than 400 leading financial institutions executives accepted our invitation. As with DeluxeSelect to expos, the knowledge exchanges resulted in a tremendous response; in fact, when we asked attendees whether they were more likely to continue or start doing business with Deluxe as a result of the meetings, a resounding 87% said yes. To build on this success we expanded the program into a year-long curriculum to share information on an ongoing basis rather on a one-time situation. Again, the response has overwhelmed us totaling in 700 subscribers within a few months. The knowledge exchanges and the accompanying program communication tools are just one more piece of our overall strategy to differentiate financial services from the competition.

Moving on to other news from financial services, earlier this month this business segment launched a new line of personal check products and accessories for the customers of its financial institutional clients. The new line includes new check designs, address labels, stationery, personalized posted notes and mouse pads. Another new product we are excited about is our gift check package. This product is perfect for those people who like to give gifts in the form of checks. Now their gift will be more personal because the check will have an appropriate reading and a company design printing on it, whether it's just a birthday message, congratulations, a holiday greeting or just because. Not only will check writers be glad with this new product but also it will provide a way for our financial institutions clients to enhance the relationship with their customers. Financial services will process orders for gift checks through our new DeluxeSelect service channels, which include our website and industry leading call centers,

Moving down to our business services segment, DBS was presented with the new vendor of the year partner award in Microsoft business solutions. Business services was one of the ten companies recognized for its outstanding achievements. Microsoft business solutions - first established an alliance with DBS in 2002 that made business services the exclusive provider of business checks and forms to Microsoft business solutions customers. Microsoft chose Business Services for a number of reasons. First, the marketing expertise acquired from serving nearly 2m small business customers. Second, its technology leadership, more specifically it's usable web-based technology and state-of-the-art telephony system. Third, its ability to deliver revenue growth, particularly during the last few years when the economy wasn't exactly robust. And finally its culture, the culture that is about inclusiveness and teamwork and entirely focused on the customer.

In other news from business services, new customer acquisition was stronger than expected throughout 2003. We attribute this to a number of factors, probably the most significant contributor is that of business partners who are seeing the value and referring their customers for business services for checks, forms, and other related products. Our business partners realize they don't have the time it takes to meet all the needs of their small business customers. So they are pleased to turn over this function to the business checks and forms experts in our customer care organization. This level of trust verifies that our referral strategy is a sound one. And that it is working very well. Another contributing factor in our improved customer acquisition was an increase in the number of small businesses that were formed in 2003. More small businesses are, of course, good for business services segment, because new businesses mean new checking accounts, and new check orders. Having a program that's effective in acquiring customers is no guarantee that you are doing the right things to retain your business. So in addition to our outstanding product selection, quality, and service, small business retention is heavily influenced by our integrated retention marketing programs. Additionally our customers are responding favorably to the consultative service they are receiving from our business checks and forms experts in our customer care organization.

In our third and last business segment, direct checks we are introducing a new product line this month called address labels. If you've already used the style of address labels that are self-adhesive and come on a handy peel-off level, you can count yourself as the user of a preferred configuration for this type of product. Between our checks unlimited and designer checks brands, customers will be able to select from 17 different designs and styles of labels and order them via direct mail or websites or the telephone. We expect this new product to have a positive impact on this business segment's non-check revenue and operating profit. Helping to ensure that it does is a substantial media campaign that's targeting both new and the existing customers.

In 2003, our direct checks business segment tested a number of other products, which have already resulted or similar results in new product initiatives around holiday labels, check kits, business cards, stationery products, calendars, and personal planners. In addition this business segment is about to introduce an identity theft protection service. I’ll share the status of all these product launches with you in the subsequent quarters.

I have just a couple of more brief items to cover before Doug rejoins me for the question-and-answer session. First we have a new Board member since our last conference call. She is Mary Ann O'Dwyer, Chief Financial Officer and senior Vice President of Finance and Operation with Wheels Inc. Wheel Auto, a leader in automotive fleet management provides corporations with solution to their fleet leasing and fleet management needs. I extend this public welcome to Mary Ann, although the Board has met only a couple of times since Mary Ann joined us, I know her 25 years of experience, her values, and her principals would be a tremendous asset to Deluxe. Mary Ann also will enhance our leadership position in Corporate Governance. The last topic on my agenda today.

One more Board related news item. Stephen Nachtsheim was appointed to the newly established position of Lead Independent Director. Stephen, a retired Senior Executive from Intel Corporation joined our Board in 1995 and has chaired the Board’s Corporate Governance Committee for several years. We created the Lead Director position to further enhance governance practices and ensure that the relationship between our Board and Management is an engaged and effective one. In his new position, Stephen will have several new duties, a few of which are to coordinate the activities of the Independent Directors, to work with me and to schedule for Board Meetings, provide input on Board meeting agendas, advice me as that the quality and timeliness of the flow of information between Management and the independent Directors, coordinate and moderate Executive Sessions of the independent Directors, and play a key role in the CEO with valuation process. I thank Stephen for taking on to support important assignment.

The last item I will comment on this morning is the one I have discussed in virtually all of the recent patience are delivered during the past few years, and I continue to mention that because its value cannot be overstated. Deluxe remains committed to transparency and financial statements and disclosures. We have expanded the disclosures and our SEC filings to ensure that our financial results are transparent, that our results accurately reflect the performance of our business, and can be easily understood by our shareholders. I believe this will be demonstrated in the 10-K and boarding materials that shareholders will receive in early April. In addition, we continue to monitor developments from the Securities and Exchange Commission, the New York Stock Exchange and other governing or regulatory bodies. We proactively address new legislation and we seek opportunities to enhance disclosure and adopt new best practices when we identify them.

Now Doug and I will take your questions.

Thank you and ladies and gentlemen if you do wish to ask a question please press the "*" followed by the "1" on your touchtone phone. You'll hear a tone indicating you've been placed in queue, and you may remove yourself from queue by pressing the "#" key. If you are using a speakerphone you may need to pickup your handset before pressing the "*" followed by the "1". So once again, if you do have a question please press the "*" followed by "1" at this time. And again, if you do have a question please press the "*" followed by the "1". And our first question comes from Trace Snell (ph.) with Priority Capital (ph.). Please go ahead.

Hi, good morning.

Good morning.

You guys did a great job summarizing some of the positive trends in business services group for the last year for 2003. Looking ahead for '04, what are some of the trends you see out there that can either be positive or negative for that group?

For which business group?

For business services.

Business services? I think we see that business group, -- the trends that we saw in 2003 continue in 2004. In both the excellent work that our team has done in selecting the products and providing the training and expertise in our call centers for the people who consult with the people calling in to work through what their needs are and providing the right products and services to meet their needs. So we see that continuing; we see the pickup in the economy certainly helping that outlook. So we see both new customer -- new business formations being a positive trend, our increasing revenue per unit being a positive trend, and for us the level of expertise that we contain internally in the training that we provide our people adding to those. I don't really see at this point in time any significant negative trends that would impact, other than general economic conditions Trace.

Okay. Thanks a lot.

Thank you and we do have question from Andrew Jones (ph.) with NorthStar Partners. Please go ahead.

Thank you. I wanted to just go back to the segment operating income numbers, and make sure that I understood which segments the charges were in, Doug, you kind of -- you went through that, but I didn't quite catch it all. If you could just help me with the fourth quarter, may be for the year as well, where we had the severance charges?

Sure Andrew. Let me give you a better feel for how those breakdown. The vast majority of the charges in the fourth quarter of the net charges of $10m, -- $11m nearly more than all the charges were actually related to the DFS or the financial services segment and there were some offsetting to the other businesses, so all of that was in Financial Services in the fourth quarter.

Okay.

For the full year, that was similar -- and the charges for the full year, again the severance charges net of the gain associated with the changes in eligibility for the retiree medical that was all in Financial Services and that totaled $13m.

Okay and the guidance for '04, flat operating income is that before or after the expense for the options?

The flat operating income guidance is before the expense for stock-based compensation.

Okay and I don't know if you can guess as to what's stock-based compensation would be, obviously, I guess it depends on the stock price, but if you assume a flat stock price is there a ballpark number?

In -- I think the best indication I can give you is that in 2003 the actual expense was $7.1m.

Okay, well. I think it's a great thing you guys are expensing that. Lastly the recent announcement of the merger with BankOne and JP Morgan who clients are they, and how do you see that impacting the business in general.

Hi, Andrew this is Larry we have both of those accounts.

Okay.

And we won’t know that until certainly if it goes through and it's impact I don't think there will be any effect in 2004 for practical purposes. But as I commented in my statement during prepared comments is anytime you put two bank of sizable it does increase their negotiating leverage. But we do retain both of them in all likelihood, so we'll have to wait and see what that does in terms of the specific, Andrew.

When are their contracts up?

They are up at different times, but it won't affect the outcome for this -- it won’t affect anything in this year.

Okay, thank you.

And again if anyone does have a question, please press "*" followed by the “1” on your touchtone phone. And we are showing a question from Patrick Donohue with Northland Securities. Please go ahead.

Good morning. What media campaigns for 2004 are you exploring for business services and specifically what are you looking to do on your own and what campaigns do you cosponsor with your business partners?

Well, I think that the in terms of, there are two areas; one if we take a look at business services with the financial institutions it depends upon each bank. It could how we work with them, it could be branded, it could be co-branded from the banks perspective, and so we respond to the banks initiatives in those areas, and most of our -- their is responding to the banks request and the programs they desire us to set up. We also do direct marketing, independent of the banks to the open market, and those are based upon catalogs that we distribute to a targeted audiences for a variety of products and services. And then we also have the relationship with the Microsoft Business Solutions, and again we work with them based upon their marketing directives and what they would like to do in designing the marketing programs. So it's -- it really is driven by our business partners and consulting with us as to what the most effective and efficient way is to reach the targeted audiences, as well as in Independent, as we look at the Independent's small business market.

Okay. And I got onto the call late so I probably missed this, what is the share count that you are using to derive your '04 guidance?

We are using the share count that we ended the year with, which was 50.2m shares plus the dilutive effect of equivalent shares, which in giving you guidance would range between 0.5m and 0.75m of shares.

Alright. Thank you, Doug.

Thanks. And we do have a question from Tom Kerr (ph.) with RDB Investments (ph.). Please go ahead.

Hi, guys. Can you kind of, -- you've touched on this a little bit but in terms of the upfront contract payments, can you kind of give us more of history, and kind of what's happened in the last year or two? Is that main significant factor in the price competition in financial services versus your competitor, you know, how does that work on the contract payments in the last couple of years, versus you know, say the last ten years?

Tom, kind of the upfront payments is essentially a pre-paid discount, so it's another way of arriving at, if you will, a net price to the financial institution for them, and this has been an increasing trend especially accelerated in the last 2 years. As we take outlook for 2004 and 2005, our desired preference would be to contain that or even have a decrease, and that would be our strategy going forward. But it is something that is in the marketplace and to which we have to be responsive, but our goal would be to try to minimize those or certainly level them off compared with our historical level, as we've mentioned in this, and may be I'll just turn it over to Doug to give some level of those from an historical perspective.

Yeah Tom, to give you some context for it, what you have in the numbers for 2003 and for 2004, we had $48m of contract acquisition payments in 2003 compared to $35m in 2002. Significantly it was very low in '99 and 2000 - meaning less than $5m in each of those years, and in 2001 it jumped up to $34m for Deluxe. So in 2001, 2002 and 2003 we've seen it increase from $34m to $35m to $48m. And it's something, as Larry had said, we view as a product -- prepaid product discount, but also we do seek to recognizing the time value of money, minimize the use of those upfront payments, and only do those as we require to in a particular bidding situation.

But do most bidding situations require that in this environment?

No.

Significant or not -- they are just a major -- the large customers?

Yes most of them do not; however; most of the large ones do require that.

Okay that helps. Thanks.

Thanks and again if any one does have a question, please press the "*" followed by the "1" on your touchtone phone. And we do have a question from Patrick Donohue with Northland Securities. Please go ahead.

Just a follow-up on a previous question with J.P. Morgan Bank One. Larry, will you be renegotiating that contract as a whole then, when these entities -- if they do come together despite them having contracts that still might be 2-3 years old?

Patrick that will depend upon the contract language that we have in each of those and the terminology and will -- is yet to be determined.

Okay. Thank you.

Thanks and we do have a question from Cliff Josephy (ph.) with HD Brouse. Please go ahead.

Hi guys. Is it fair to assume that long-term investments held steady at around $40m in the quarter?

Yes it is.

Okay. So then the bump up in the other non-current assets of about $24m sequentially, where do that come from?

The long-term assets -- the other long-term assets, the long-term investments stayed relatively flat, as you mentioned. Contract acquisition payments on -- as a -- for long-term assets grew -- compared to 2002 grew and I don’t know if you are comparing at the end of Q3 to Q4, but compared to 12/31/2002 it grew by $41m.

So, they were $96m?

Yes.

I see and the -- and then the deferred advertising costs?

Deferred advertising costs were higher as well. That was the other significant contributing factor increased to $29m at the end of 2003.

Okay, so that’s 16. Okay, and then what about the prepaid post retirement asset?

That increased slightly - less than $4m.

So about 19m or 20m?

Correct.

Okay and then the other non current assets -- that would list in your -- as it would list in your Q or K category?

Right. Those would net to nearly flat.

Okay. Thank you very much.

Okay.

Thanks and once again if anyone does have a question please pres the "*" followed by the "1". And Mr. Mosner at this time I am showing no further questions in queue.

Well thank you. On behalf of Doug and myself, I'd like to thank all of you for attending today's call and for your interest in Deluxe Corporation. And I speak for the entire leadership team and Deluxe's Board when I say we believe we can achieve our performance targets in 2004 by continuing to be relentless in managing our costs and by driving increased revenue check order. And now I want to turn the call back to Stu.

Thanks Larry. Just as a reminder that a replay of this call will be available until February 5, 2004 by dialing 320-365-3844. When instructed, provide the access code 716731. The audio presentation and accompanying slides also will be archived on Deluxe's web site - www.deluxe.com. Again thank you for joining us today.

Thank you, and ladies and gentlemen that does conclude our conference for today. Thanks for your anticipation and for using AT&T's Executive Teleconference. You may now disconnect.